Understanding Merchant Service Provider Rates

In online business today, accepting credit cards is a must. Consumers enjoy both the convenience and the security of buying with a credit card. But as a merchant, accepting credit cards can be costly if you're not aware of the potentially numerous charges levied on merchants by card associations and merchant service providers (MSPs).

So how do you know how much you'll pay your MSP for each transaction? What you'll pay is based on a variety of factors, but two main elements are how the transaction is classified and your average ticket sale.

How Do You Rate?

Each of your transactions will be classified as either qualified, midqualified, or nonqualified. These three classifications are based on Visa/MasterCard regulations. Transactions that do not satisfy all qualified transaction conditions, as established by Visa and MasterCard, are assessed either a midqualified or a nonqualified surcharge.

The category of credit card used in a transaction is one factor that determines how a transaction is classified. For example, corporate cards are often considered high-risk. Therefore, a transaction done with a Visa Business Card might cost a merchant as much as 1.40% more in surcharges when categorized as nonqualified.

Other factors that determine whether a transaction is classified as qualified, midqualified, or nonqualified are whether the address verification system (AVS) was used and whether the order was shipped within 24 hours.

Make sure you've read the complete list of criteria for determining how a transaction is classified so you can meet those criteria with each transaction. Your MSP should be able to provide you with this list.

Watch Those Numbers

Don't be fooled by the rate game. What might be a good rate for merchants with higher average ticket sales -- the average amount charged per item sold -- could be a costly rate for merchants with lower averages.

To understand how this works, you first need to understand rate terminology. Most merchant service providers charge a discount rate for each transaction, bundled with a per-transaction fee. The term discount rate is a misnomer because there's really no discount involved. This rate is a percentage applied to the dollar value of each transaction. The per-transaction fee is a flat fee charged for each transaction.

Here's a formula to determine whether the rates charged by your MSP are the most cost-effective, given your average ticket sale:

Per-transaction rate divided by the average ticket sale plus the discount rate.

This formula assumes the transaction is qualified. For midqualified or nonqualified transactions, additional surcharges would be levied.

Here's an example: Merchant #1's average ticket sale is $100 (U.S.). The discount rate is 1.65% and the per-transaction fee is 30 cents.

30 cents divided by 100 = .003 + .0165 = .0195 or 1.95%.

Merchant #2's average ticket sale is $20 with rates and fees the same as those paid by Merchant #1. Look at the difference:

30 cents divided by 20 = .015 + .0165 = .0315 or 3.15%.

Merchant #1 will pay $1.95 for each qualified transaction of $100. Merchant #2 will pay $3.15 for $100 in sales volume, a difference of $1.20 for the same amount of sales volume at the same rate.

If you're trying to determine how to reduce the cost of processing credit cards online, keep these two factors in mind. Be aware of the criteria you need to meet in order to avoid paying midqualified or nonqualified surcharges, and make sure you're paying a rate appropriate to your average ticket sale.